Only weeks ago Italian technocrat Prime Minister Mario Monti proselytized that the Eurozone crisis was “almost over”. It felt like more propaganda from the European establishment, and since returning from the Easter break the markets don’t seem to be agreeing with him. Spanish and Italian yields are firmly on the rise again, marking a reverse of the trend helped into action by €1bn of refinancing money from the ECB. Tensions are rising once more given that Spain and Italy are 'too big to bail'.
We’ve touched on Italy before in these pages; her lack of competitiveness, and her long term debt accumulation antics. Although some facts about Spain’s plight have become pub and dinner party conversation, >22% unemployed and >50% youth unemployment, Spain is increasingly unable to escape investors’ attention. Spanish 10-year bond yields hit 6% yesterday. Without more LTRO from the ECB the march to the psychologically crucial 7% mark looks likely.
Spanish Prime Minister Mariano Rajoy postures as desperately trying to cut his deficit, but his efforts lack credibility. The political classes are in a bind; too used to over promising to voters who expect too much. In the words of Jean Claude Juncker: “We all know what to do, we just don't know how to get re-elected after we've done it.
Two key issues for Spain
In his excellent newsletter, Things That Make You Go Hmmm, Grant Williams gets to the core of the focus on Spain:
Spain’s real problems lie in the reality of her published government debt numbers and at the heart of her banking system. It is in these two places that any clues lie as to her chances of upsetting ‘Recovery’ on its dash for the line.
Analysts are aware of Spain’s ‘Hidden Debt’ problem, but are concerned with how difficult to gauge the extent of it is. Estimates range from a further €20 – €50bn of Hidden Debt that should be added to Spain’s reported national debt figure of €915bn.
The Hidden Debt gremlins emerged when newly elected members of Mr Rajoy’s administration arrived at their localities and found the finances revealed greater excesses than had been reported. As the New York Times (NYT) reports, in Catalonia regional debt had been thought to be 2% of GDP during the…
